Global Bond Rally Leaves U.S. Yields on Top

In the global bond rally, the U.S. stands alone.

More than 90% of developed-market government bonds have yields that are lower than the Federal Reserve’s benchmark overnight interest rate, according to Bianco Research, up from about 40% in 2015. Even the yield on 10-year debt from Greece, buffeted in recent years by economic and political toil, trades below the federal-funds rate.

The Fed has raised interest-rates nine times in recent years, while the

Bank of Japan

adopted a negative interest-rate policy and the European Central Bank pulled rates further below zero. The divergence has contributed to a widening gap between the yields on U.S. government bonds and other sovereign debt.

Now signs of slowing growth have pushed central banks around the world to lower rates or prepare other monetary stimulus, hoping to prolong the postcrisis economic expansion.

Higher interest rates can crimp growth by cutting down on borrowing and spending. Yet investors also see rising rates as a sign of economic strength. While investors expect the Fed to cut rates at its July meeting this week, and multiple times this year, Friday’s gross domestic product data suggest the U.S. continues to grow steadily, helping keep Treasury yields relatively high.

The Fed’s benchmark federal-funds rate has sat in a range of 2.25% to 2.5% since policy makers last raised it in December. The European Central Bank’s key rate has been below zero since 2014.

“The Fed now finds itself where it’s getting dragged back to a slow-growth environment,” said Lynda Schweitzer, co-head of global bonds at Loomis Sayles & Co. The firm has sought higher yields in countries including Hungary, South Africa and Brazil.

Yields for 10-year government debt in nine countries, including Germany, Japan, Sweden and France traded below zero Friday. That means investors pay more for the bonds than the total of their face value plus all future interest payments, effectively paying those countries to hold their money. About 25% of all bonds in the world now have negative yields, according to Deutsche Bank Securities.

Negative yields in Europe—particularly in Germany, the continent’s largest economy—point to a need for more government spending to lift growth and inflation, analysts said. Germany, where the yield on its 10-year government bonds has fallen below negative 0.4%, has been running a budget surplus, pulling money out of the economy.

“Much of that has to do with tariffs, protectionism and the backlash against globalization,” said Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research. “It points the finger at policy makers outside of central banks.”

At the same time, investors have been piling into bets that the Fed will reduce interest rates a number of times in the next 12 months. Federal-funds futures show investors place better-than-even odds that policy makers will cut interest-rates at least three times by the end of the year, according to CME Group data.

Those expectations have pinned the yield on three-month U.S. government bills above the yield on the benchmark 10-year Treasury note for most of the past two months. Investors view that phenomenon, known as an inverted yield curve, as a signal of a coming recession.

Some analysts said a resolution to trade tensions between the U.S. and China would help boost the world-wide economy. As China’s economic expansion has cooled, consumers there have reduced spending on imports from Europe, contributing to the slower growth there, analysts said.

The International Monetary Fund cited slower trade last week when it lowered its global growth forecast for 2019. Fed officials have also said that trade friction is an important factor in their decision-making.

James Bianco, president of Bianco Research, said he expects the Fed to cut interest rates a total of 1 percentage point in the next 12 months, starting Wednesday.

“U.S. interest-rates are out of line with the rest of the world,” he said. “If we don’t get them back in line, we’ll have a real problem with too-tight money.”

Write to Daniel Kruger at Daniel.Kruger@wsj.com

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